Which of the following statements regarding NPV analysis is correct?
A) NPV calculations do not depend critically on cash ﬂow projections.
B) NPV calculations are only as good as the information that goes into their calculation.
C) Negative NPV projects should be scrutinized to make sure there is a sound economic basis underlying them.
D) Positive NPV projects that have relatively low levels of ﬁxed costs should be more heavily scrutinized than projects with relatively high levels of ﬁxed costs.
E) NPV calculations will lead to correct decision-making even if the wrong discount rate is used.

Question

Quizplus · Accepted Answer

NPV calculations heavily rely on cash flow projections, which means they are only as good as the information that goes into them. Negative NPV projects should be scrutinized to make sure there is a sound economic basis behind them, and positive NPV projects with relatively low levels of fixed costs carry less risk and may require less scrutiny. NPV calculations are highly dependent on the discount rate used, so if the wrong discount rate is used, the decision reached may not be accurate.

Which of the Following Statements Regarding NPV Analysis Is Correct